Opinion

Alison Frankel

S&P: State AGs trying to usurp federal regulation of rating agencies

Alison Frankel
Apr 8, 2013 21:20 UTC

Over the next few weeks, federal courts in more than a dozen states are going to begin to consider a very interesting question: Does coordination between and among state attorneys general and the U.S. Department of Justice constitute an improper attempt to override federal regulation?

The credit rating agency Standard & Poor’s is asserting that it does, in an argument that could affect how state AGs enforce consumer laws against defendants in regulated industries. You’ll recall that when the Justice Department announced its $5 billion suit against S&P in February, seven state AGs were in attendance to announce their own parallel state-court claims that the rating agency lied about its independence and objectivity, in violation of state consumer protection and trade practice laws. Three such suits, by Connecticut, Illinois and Mississippi, were already under way at the time of the Justice Department filing, and several more states have since brought claims in their home courts. S&P has now removed all of the state-court AG cases to federal court and has asked the Judicial Panel on Multidistrict Litigation to consolidate the proceedings before one of two judges in federal court in Manhattan.

The rating agency’s lawyers at Cahill Gordon & Reindel argue that the coordinated attack by the Justice Department and the state AGs is a de facto pre-emption of the Credit Rating Agency Reform Act of 2006, which gave oversight of S&P and its competitors to the Securities and Exchange Commission. “Taken as a whole, the actions represent a concerted effort to undermine, if not supplant, a detailed, comprehensive and carefully balanced federal scheme through patchwork and inevitably conflicting rulings across the country,” Cahill wrote in S&P’s brief to the JPMDL. “These nominally separate actions – the vast majority of which were filed on the same day and touted as the result of a ‘coordinated’ effort at a joint press conference held by several of the Attorneys General to announce their filing – are, in effect, a single hindsight-infused attempt by the states to lay blame with S&P for failing to predict the financial crisis and they should be treated collectively.”

When S&P made a pre-emptive strike against suits by the AGs of South Carolina and Tennessee by filingdeclaratory judgment actions in federal court, I said that I didn’t think much of the rating agency’s straw-man argument that credit ratings are protected by the First Amendment, since that wasn’t at issue in the state cases. But S&P’s pre-emption argument isn’t so easily dismissed. At the very least, the credit rating agency has bought itself time. (More on that below.) And if it convinces the JPMDL that the state actions interfere with federal regulation, it could seriously impair state enforcement actions.

One immediate benefit of S&P’s maneuver has been to slow down litigation against it. After removing the AG cases to federal court and filing a transfer order before the JPMDL, S&P moved to stay proceedings until the panel decides whether to consolidate the suits. States have generally opposed the stay – they’re eager to litigate remand motions – but on Friday, a federal judge in Pennsylvania agreed to put AG Kathleen Kane’s case on hold until the JPMDL makes a decision. Meanwhile, as S&P forces states to move for remand, oppose its stay motion and oppose consolidation by the JPMDL, it forestalls its day of reckoning on the merits of the state claims against it.

New brief: Morgan Stanley, rating agencies conspired on 2007 SIV

Alison Frankel
Oct 10, 2012 23:45 UTC

A few months ago, plaintiffs’ lawyers at Robbins Geller Rudman & Dowd created quite a stir when they filed thousands of pages of deposition transcripts and other juicy discovery in an investors’ fraud case against Morgan Stanley, Standard & Poor’s and Moody’s. The documents — exhibits to the investors’ summary judgment motion — included never-before-seen internal communications between Morgan Stanley and the rating agencies as they worked on a structured investment vehicle known as Cheyne, putting on public display the allegedly half-cocked evaluations that Moody’s and S&P performed in 2005, when they were swamped with subprime mortgage-backed financial instruments to rate.

On Wednesday, the Robbins Geller team, led by Daniel Drosman and Luke Brooksfiled a new brief in a parallel case accusing Morgan Stanley, S&P, Moody’s and Fitch of defrauding two pension funds that invested in an SIV called Rhinebridge, which, in contrast to the Cheyne SIV, was sold in July 2007, as the housing bubble was already collapsing. It’s another must-read for students of the financial crisis.

The Rhinebridge brief, which also references all kinds of evidence from inside the bank and the rating agencies, doesn’t have as many notable quotables as the Cheyne filing. But its allegations are, in a way, even grimmer. According to the brief, which opposes motions for summary judgment by Morgan Stanley and the rating agencies, the defendants all knew the end was near for mortgage-backed securities. Yet (again, according to the brief) Morgan Stanley pushed the agencies to deliver high ratings on the Rhinebridge SIV, even as S&P and Moody’s supposedly questioned the percentage of shaky mortgage loans packed into it. Then, despite internal fears that Rhinebridge was too risky to survive, Morgan Stanley allegedly marketed the SIV to Robbins Geller’s clients, mentioning nothing about its concerns the investment would collapse. Just four months after Rhinebridge launched, and two months after the pension funds bought in, the SIV defaulted, en route to being auctioned off at steep losses for investors.

Angry about possible U.S. downgrade? Don’t bother suing raters

Alison Frankel
Aug 2, 2011 22:27 UTC

With U.S. markets fretting Tuesday at the prospect of a downgrade in the government’s triple-A credit rating, you may be wondering: Who can we sue? Litigation, after all, is practically an unalienable American right. The problem, however, is that any attempt to sue the credit rating agencies for downgrading U.S. securities will run smack into the Bill of Rights. The rating agencies, as many a disgruntled mortgage-backed securities investor has discovered in the last few years, are shielded from liability because their ratings are considered to be public opinion protected by the First Amendment of the U.S. Constitution.

The agencies’ First Amendment protection dates back at least to 1999, when the U.S. Court of Appeals for the Tenth Circuit upheld a Colorado judge’s dismissal of a case against Moody’s Investor’s Services. The Jefferson County School District had sued Moody’s, claiming that the credit rating agency published an unfair assessment of the district’s 1993 bond offering. (The suit alleged that Moody’s was retaliating because the district hired other agencies to rate the bonds, but that wasn’t important in the case’s outcome.) Jefferson County, which had to re-price the bonds after the unfavorable Moody’s report, claimed the rating agency had illegally interfered with its bond offering and also committed antitrust violations.

The trial court treated Moody’s as a member of the media and found that the First Amendment protected its report on the school district bond offering from both state and federal claims. On appeal, the school board argued that the report was not protected free speech, but the Tenth Circuit disagreed. The appellate panel didn’t even waste much time discussing the trial court’s assumption that Moody’s is entitled to the same First Amendment protection as, say, Reuters. Instead, the Tenth Circuit opinion analyzed the allegedly false statements in the Moody’s report and concluded they’re too vague to be “provably false,” so Moody’s was constitutionally protected.

  •